This document discusses various internal and external sources of finance that businesses can use to obtain funding. Internal sources include owner's investment, retained profits, sale of stock, sale of fixed assets, and debt collection. External sources include bank loans, overdrafts, additional partners, share issues, leasing, hire purchase, mortgages, trade credit, and government grants. The choice of financing depends on factors like the purpose of funds, time period needed, amount required, and type of business ownership.

1. SOURCES OF FINANCE
Different ways a business can
obtain money

2. Sources of Finance
• Sources of finance can be classified into:
– Internal sources (raised from within the
organisation)
– External (raised from an outside source)

3. Internal Sources
• There are five internal sources of finance:
– Owner’s investment (start up or additional
capital)
– Retained profits
– Sale of stock
– Sale of fixed assets
– Debt collection

4. Internal Sources
Owner’s investment
• This is money which
comes from the owner/s
own savings
• It may be in the form of
start up capital - used
when the business is
setting up
• It may be in the form of
additional capital –
perhaps used for
expansion
• This is a long-term source
of finance
Advantages
• Doesn’t have to be repaid
• No interest is payable
Disadvantages
• There is a limit to the
amount an owner can
invest

5. Internal Sources
Retained Profits
• This source of finance is
only available for a
business which has been
trading for more than one
year
• It is when the profits
made are ploughed back
into the business
• This is a medium or long-
term source of finance
Advantages
• Doesn’t have to be repaid
• No interest is payable
Disadvantages
• Not available to a new
business
• Business may not make
enough profit to plough
back

6. Internal Sources
Sale of Stock
• This money comes in
from selling off unsold
stock
• This is what happens in
the January sales
• It is when the profits
made are ploughed back
into the business
• This is a short-term
source of finance
Advantages
• Quick way of raising
finance
• By selling off stock it
reduces the costs
associated with holding
them
Disadvantages
• Business will have to take
a reduced price for the
stock

7. Internal Sources
Sale of Fixed Assets
• This money comes in
from selling off fixed
assets, such as:
– a piece of machinery that is
no longer needed
• Businesses do not always
have surplus fixed assets
which they can sell off
• There is also a limit to the
number of fixed assets a
firm can sell off
• This is a medium-term
source of finance
Advantages
• Good way to raise
finance from an asset that
is no longer needed
Disadvantages
• Some businesses are
unlikely to have surplus
assets to sell
• Can be a slow method of
raising finance

8. Internal Sources
Debt Collection
• A debtor is someone who
owes a business money
• A business can raise
finance by collecting the
money owed to them
(debts) from their debtors
• Not all businesses have
debtors ie those who deal
only in cash
• This is a short-term
source of finance
Advantages
• No additional cost in
getting this finance, it is
part of the businesses’
normal operations
Disadvantages
• There is a risk that debts
owed can go bad and not
be repaid

9. External Sources
• There are five internal sources of finance:
– Bank Loan or Overdraft
– Additional Partners
– Share Issue
– Leasing
– Hire Purchase
– Mortgage
– Trade Credit
– Government Grants

10. External Sources
Bank Loan
• This is money borrowed
at an agreed rate of
interest over a set period
of time
• This is a medium or long-
term source of finance
Advantages
• Set repayments are
spread over a period of
time which is good for
budgeting
Disadvantages
• Can be expensive due to
interest payments
• Bank may require
security on the loan

11. External Sources
Bank Overdraft
• This is where the business is
allowed to be overdrawn on its
account
• This means they can still write
cheques, even if they do not
have enough money in the
account
• This is a short-term source of
finance
Advantages
• This is a good way to cover the
period between money going
out of and coming into a
business
• If used in the short-term it is
usually cheaper than a bank
loan
Disadvantages
• Interest is repayable on the
amount overdrawn
• Can be expensive if used over
a longer period of time

12. External Sources
Additional Partners
• This is sources of
finance suitable for a
partnership business
• The new partner/s can
contribute extra capital
Advantages
• Doesn’t have to be
repaid
• No interest is payable
Disadvantages
• Diluting control of the
partnership
• Profits will be split more
ways

13. External Sources
Share Issue
• This is sources of
finance suitable for a
limited company
• Involves issuing more
shares
• This is a long-term
source of finance
Advantages
• Doesn’t have to be
repaid
• No interest is payable
Disadvantages
• Profits will be paid out
as dividends to more
shareholders
• Ownership of the
company could change
hands

14. External Sources
Leasing
• This method allows a
business to obtain assets
without the need to pay a
large lump sum up front
• It is arranged through a
finance company
• Leasing is like renting an
asset
• It involves making set
repayments
• This is a medium-term
source of finance
Advantages
• Businesses can have the
use of up to date equipment
immediately
• Payments are spread over
a period of time which is
good for budgeting
Disadvantages
• Can be expensive
• The asset belongs to the
finance company

15. External Sources
Hire Purchase
• This method allows a business
to obtain assets without the
need to pay a large lump sum
up front
• Involves paying an initial
deposit and regular payments
for a set period of time
• The main difference between
hire purchase and leasing is
that with hire purchase after all
repayments have been made
the business owns the asset
• This is a medium-term source
of finance
Advantages
• Businesses can have the use
of up to date equipment
immediately
• Payments are spread over a
period of time which is good for
budgeting
• Once all repayments are made
the business will own the asset
Disadvantages
• This is an expensive method
compared to buying with cash

16. External Sources
Mortgage
• This is a loan secured on
property
• Repaid in instalments over
a period of time typically 25
years
• The business will own the
property once the final
payment has been made
• This is a long-term source
of finance
Advantages
• Business has the use of the
property
• Payments are spread over a
period of time which is good for
budgeting
• Once all repayments are made
the business will own the asset
Disadvantages
• This is an expensive method
compared to buying with cash
• If business does not keep up with
repayments the property could be
repossessed

17. External Sources
Trade Credit
• Trade credit is summed up by
the phrase:
buy now pay later
• Typical trade credit period is
30 days
• This is a short-term source of
finance
Advantages
• Business can sell the goods
first and pay for them later
• Good for cash flow
• No interest charged if money is
paid within agreed time
Disadvantages
• Discount given for cash
payment would be lost
• Businesses need to carefully
manage their cash flow to
ensure they will have money
available when the debt is due
to be paid

18. External Sources
Government Grants
• Government
organisations such as
Invest NI offer grants
to businesses, both
established and new
• Usually certain
conditions apply, such
as where the
business has to
locate
Advantages
• Don’t have to be
repaid
Disadvantages
• Certain conditions
may apply eg location
• Not all businesses
may be eligible for a
grant

19. Factors Affecting Choice
of Source of Finance
• The source of finance chosen will depend
on a number of factors:
– Purpose – what the finance is to be used for
– Time Period – how long the finance will be
needed for
– Amount – how much money the business
needs
– Ownership and Size of the business